A company has determined that its optimal capital structure: of 40% debt and 60% equity. The firm forecasted that it will not have enough retained earnings to fund the equity portion of its capital structure. As of today this company has an outstanding shares of 10,000. The following are data collected by the firm whose net income is P40,000 and stock price is P25: • Cost of debt = 8%. • Payout ratio = 50%. • Tax rate = 40%. • Flotation cost on additional equity = 15%. • Growth rate = 0%. What is the amount of the weighted after tax cost of debt? a. 1.45% b. 1.92% c. 2.04% d. 2.36%
A company has determined that its optimal capital structure: of 40% debt and 60% equity. The firm forecasted that it will not have enough retained earnings to fund the equity portion of its capital structure. As of today this company has an outstanding shares of 10,000. The following are data collected by the firm whose net income is P40,000 and stock price is P25: • Cost of debt = 8%. • Payout ratio = 50%. • Tax rate = 40%. • Flotation cost on additional equity = 15%. • Growth rate = 0%. What is the amount of the weighted after tax cost of debt? a. 1.45% b. 1.92% c. 2.04% d. 2.36%
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 7P
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A company has determined that its optimal capital structure: of 40% debt and 60% equity. The firm forecasted that it will not have enough retained earnings to fund the equity portion of its capital structure. As of today this company has an outstanding shares of 10,000. The following are data collected by the firm whose net income is P40,000 and stock price is P25: • Cost of debt = 8%. • Payout ratio = 50%. • Tax rate = 40%. • Flotation cost on additional equity = 15%. • Growth rate = 0%.
What is the amount of the weighted after tax cost of debt?
a. 1.45%
b. 1.92%
c. 2.04%
d. 2.36%
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